A Wild Ride

Over the past decade, Nascar has raced to the top of the sports world. Is it finally beginning to slow down?John Goff, CFO MagazineAugust 1, 2007

Speed. It's about speed. That may seem ridiculously obvious — like saying the sun is a tad on the warm side. But to witness up close how cars accelerate out of a turn, their 800-HP engines thundering, the g-forces pinning drivers to their seats as they streak past the grandstand, is to understand the visceral appeal of stock-car racing.

It's also about heroes, and villains, and rivalries. The original good ol' boys of the 1940s might have been ex-moonshiners, but today's stock-car racers are media-savvy celebrities — Jeff Gordon, Dale Earnhardt Jr., Tony Stewart. Their bumper-to-bumper duels are broadcast 10 months of the year, and their off-track lives are fodder for People magazine.

And, of course, it's about the cars themselves — Ford, Chevy, Dodge, and the new gunslinger in town, Toyota. And then there are the other corporate sponsors, whose colorful logos adorn practically every inch of cars and drivers alike.

No one understands all this better than the people who run the National Association for Stock Car Auto Racing (Nascar). Over the past decade, they have been growing the family-run sanctioning body, and the sport, at a blistering pace. Races have been added, TV coverage expanded, big-hitting sponsors signed up. Stock-car fans now number 75 million worldwide, and total industry revenues from racing — estimated to have increased at a 14 percent compounded annual clip during the past decade — reportedly top $3.4 billion (outpacing the National Basketball Association, among others).

Now, however, for the first time in memory, the money coming into the sport is leveling off. Nascar-licensed retail sales have hovered around $2 billion since 2004, following years of double-digit increases. Track attendance is down, as are TV ratings.

Racetrack operators like Speedway Motorsports Inc. (SMI) and the Nascar-connected International Speedway Corp. (ISC) are already feeling the pinch. So are racing teams, which are suddenly finding it harder to line up sponsorship money to fund an increasingly expensive pursuit. Last year, PPI Motorsports failed to attract sufficient sponsorship and closed its doors.

Even marquee teams like Roush Fenway Racing and Joe Gibbs Racing are starting to worry. Forbes magazine estimates that 4 out of the top 15 racing operations in Nascar lost money last year, while several others barely eked out an operating profit.

The very success of Nascar may now be working against it. Its decline in popularity "could be due to overexposure in some markets," says Michael Pitts, an associate professor at Virginia Commonwealth University's School of Business. "It could be that there are so many other choices. Or it could be that Nascar is becoming passé."

Running Wide Open
Critics suggest that teams should simply spend less. But as Scott Lampe, CFO at racing heavyweight Hendrick Motorsports, points out, throttling down on expenses is difficult in a business where operating units are measured by pole positions, not cash positions. "The frustrating thing about being a CFO in this business," says Lampe, "is that it's not like I can go to a crew chief and say, 'Hey, what does your P&L look like this year?'"

A visit to the Hendrick facility on the outskirts of Charlotte, North Carolina, reveals just how capital-intensive stock-car racing has become. A software programmer tests a powerful engine while sitting behind protective bulletproof glass. New paint schemes are applied to Jeff Gordon's and Jimmie Johnson's cars in cubicles that resemble clean rooms. Everywhere, well-educated, well-paid employees test, retest, and calibrate.

According to estimates, top teams spend anywhere from $150,000 to $175,000 to build a single race car, including the engine (which, repeatedly rebuilt, has a lifespan of about 15 races). Overall, the tab for running a top-tier racing team looks to be north of $20 million (see "Sticker Shock" at the end of this article). "It's getting very expensive to race," says Lampe, a former auditor who did Hendrick's taxes before joining the company in 1999.

In the past, the rising costs of racing were more than offset by sizable increases in sponsorship cash, licensing fees, and prize money. Indeed, over the past 10 years, annual revenues at Hendrick have jumped from $50 million to $200 million. One published account pegs its 2006 earnings before interest, taxes, depreciation, and amortization at around $39 million. But a bad racing year, with reduced prize winnings, would substantially lower Hendrick's profit.

That's not going to happen this year — Hendrick drivers have won 10 of the first 19 races in the Nextel Cup, Nascar's premier racing circuit. Nevertheless, a nearly double-digit increase in expenses, including racing costs, R&D, facility costs, and SG&A, is starting to eat into the company's margins. For CFOs at other businesses, the typical response to rising costs amid a market slowdown would be to limit budget increases. But for many teams, winning is the only KPI that matters.

"There are two ways to budget in this business," notes Lampe. "Figure out what you need to win, and that's your budget — that's how we do it. Or, figure out what your sponsors are paying, and that's your budget."

Tivo-Proof
The number of corporations willing to pay big money to sponsor stock-car racing teams appears to be dwindling, thanks in part to troubled business sectors. In March, for example, besieged mortgage lender Ameriquest withdrew its sponsorship of Roush Fenway's No. 16 car, driven by Greg Biffle, two years before the contract was up.

While the powerful Roush Fenway team will no doubt find a sponsor for Biffle's ride, corporate boosters appear to be holding the line on their investments. This is understandable. Primary sponsorships are getting pricey, now between $15 million and $20 million. Even lower-profile sponsors, so-called major associates, pay anywhere from $2 million to $4 million to put a decal on the rear deck lid of a stock car.

Until recently, backing a Nascar team was one of the best buys in marketing. A corporate logo emblazoned on the hood and trunk of a race car is perfect product placement — "Tivo-proof" is how one racing executive puts it. In fact, sports-marketing specialist Joyce Julius & Associates reckons all sponsors involved in Nascar's top series, the Nextel Cup, received $5.2 billion in TV exposure last year. That's up 353 percent from 1997.

But with Nascar's television numbers dipping — down 12 percent from 2005 — sponsors are getting less mileage out of their investments. (TV ratings for other pro sports are falling, too.) Not surprisingly, sponsors are becoming more selective. "There's a lot of competition for sponsors right now," says Larry DeGaris, president of sports-marketing firm Sponsorship Research & Strategy. "Teams are going to be selling against each other."

That will be hard on smaller racing outfits, particularly one-car teams. Once the dominant force in the sport, these small shops are finding it increasingly difficult to attract corporate funding. Of the nearly 50 drivers currently on the Nextel Cup series drivers list, only 7 are employed by single-car operators.

A Host of Suitors
At Nascar's Daytona Beach, Florida, headquarters, CFO Todd Wilson says the sanctioning body works on cost control "every day and for a long time. It's one of the real obligations we have in terms of managing the sport." One of the latest and most ambitious cost-control measures is a new standard car design, the so-called Car of Tomorrow (see "The Cost of Tomorrow" at the end of this article).

Another obligation is to divvy up the revenues flowing into the sport "so that everybody is happy," says Wilson. That's no small feat. The racing teams in Nascar are independent contractors, not franchises. Racetracks, too, are owned not by teams or municipalities, but by promoters. Given the number of parties involved in stock-car racing, as well as the phalanx of sponsors, rights deals can get complicated.

Take the media-rights contract signed by Nascar in 2005. The agreement, which took effect this year, runs through 2015 and is worth an estimated $4.5 billion. Of that sum, track operators purportedly receive 65 percent, racing teams get 25 percent (in the form of prize money), and Nascar gets 10 percent. Straightforward enough. But negotiating the multinetwork deal with a host of suitors — including NBC, Fox, ABC, ESPN, TNT, and Speed — took the better part of a year, says Wilson, who joined Nascar from Arthur Andersen in 1999.

"In a TV deal, rights packages are constantly being rejiggered," explains Wilson. "Somebody wants a particular race, or somebody wants a particular date. And just when you get it right, some small change happens."

Or some big one. Before the deal closed, NBC dropped out of the bidding when it landed the rights to "Sunday Night Football." Further complicating matters, ESPN was apparently keen to gain wireless rights for the ESPN Mobile service it was helping to launch. But wireless provider Nextel happens to be one of the three main sponsors of Nascar's signature circuit. Obliging ESPN while keeping Nextel content was no minor accomplishment. "We went to the nth degree to accommodate ESPN's request," recalls Wilson.

Then, just months after the deal was signed, ESPN announced it was closing down ESPN Mobile. Still, Wilson says getting ESPN back into the fold (the cable network used Nascar broadcasts as late-night filler in the 1980s) was worth the effort. "We're trying to convert the general sports fan to a Nascar fan," he explains. "ESPN is good at that."

Not everyone was happy with the deal. Although the press initially hailed it, the stock market turned thumbs down, sending the share price of publicly traded racetrack operator SMI from $39 to around $34. One major concern is that the contract is back-loaded, meaning that its annual payout won't exceed last year's until 2012. Like the turns at Darlington, "the contract is steeply banked," says one wag.

Limits to Expansion
William Brooks knows something about steep banks. A former auditor at PricewaterhouseCoopers, Brooks is CFO at Charlotte-based SMI. The company operates six racetracks, including the high-banked Lowe's Motor Speedway. SMI speedways host 10 of 36 Nextel Cup regular-season races (rival ISC, a company with ties to the France family, which owns Nascar, hosts 21 of the races).

SMI leverages its assets by renting out the tracks to car shows, enthusiasts' clubs, even filmmakers (Tom Cruise's Days of Thunder was filmed at the Lowe's track). But the reality is, SMI depends on Nascar for 80 percent of its revenues. A slowdown in stock-car racing, therefore, means a slowdown for SMI.

The track operator may already be feeling the effects. Last year, revenues at the company rose to $567 million, the seventh straight annual increase. But the gain was a modest 4 percent over the previous year, while revenues from admissions actually fell. Net income for the first quarter of 2007 was down slightly from the same period in 2006.

In the past, the company has been able to boost admissions by expanding the permanent seating capacity at its six facilities. But there may be little room left. Bristol Motor Speedway, in Bristol, Tennessee, is a stark example: since acquiring the famed short-course track for $26 million in 1996, SMI has more than doubled the number of seats, from 71,000 to 160,000. Many racetracks, particularly older ones, already overwhelm local infrastructures on race days.

SMI plans to sell more merchandise and memorabilia at the track. Last year, event-related revenue increased nearly 9 percent, to a record $15 million. If the economy gets worse, though, accessories could be a tough sale. "You can't sell programs," says Brooks, "when people are stressed about the price of gas."

Brooks says SMI will look to grow the business by, among other things, bringing in more sponsorship money. It's a viable strategy, although in a sputtering Nascar, less money will likely be available to go around. "If Nascar is not as popular going forward," says Brooks, "promoters could take a beating."

The Hat Dance
Of course, any sport that can get 100,000 spectators to endure a traffic jam lasting as long as the event itself is probably not a candidate for Chapter 11. Says Nascar president Mike Helton: "All businesses go through cycles. The wheels haven't come off."

Certainly, Nascar's core fans continue to exhibit remarkable loyalty to their favorite drivers — and to the sponsors of their favorite drivers. According to a survey conducted by Performance Research, a marketing analysis firm, nearly half of Nascar's 30 million self-described "big" fans make an effort to look for sponsors' products when they're shopping. "The economic reality is, sponsors are bringing the sport to fans," says Sponsorship Research's DeGaris. "Nascar fans understand this."

So do Nascar drivers. With the overall cost of sponsoring a top racing team now exceeding $30 million a year (that includes related promotions), teams have become beholden to sponsors. In fact, when a victorious driver is interviewed on TV, every few seconds an assistant will hand him a new cap to don, each with a different corporate logo. In racing circles this has come to be known as the Hat Dance.

Nascar also wears several hats: sanctioning body, marketer, and for-profit business. This can lead to conflicts. Take Nascar's relationship with the three lead sponsors of the Nextel Cup: Nextel, Sunoco, and Goodyear. The sponsorship fees go to Nascar, as well as to the tracks and racing teams (in the form of bonus money, tires, and free gasoline). Nextel struck a 10-year deal in 2004 for a reported $700 million to turn the Winston Cup into the Nextel Cup. In return, Nextel (now Sprint Nextel) receives marketing exclusivity on the circuit for 10 years. "Teams are asked to restrict their [sponsorship] involvement in the three categories [represented by the three lead sponsors]," explains Wilson. "It's important for us to be able to regulate that."

But Nascar is finding it increasingly difficult to keep the peace between rival sponsors. One published account claims Sunoco complained about the size of the Shell Oil logo on Kevin Harvick's uniform after the driver won the Daytona 500 in February. In turn, Nascar officials are believed to have asked Harvick to reduce the size of the logo.

Hold the Phone
More ominously, in a move that rocked the industry, AT&T recently sued Nascar. The reason? AT&T wants to stick its corporate logo on Jeff Burton's No. 31 car. For the past six years, Burton's car, which is owned by Richard Childress Racing, has been sponsored by wireless-carrier Cingular, a joint venture between AT&T and Bellsouth Corp. But with the recent merger between those two telecommunications companies, AT&T management has rebranded Cingular under the AT&T name.

There's just one hitch. Nextel's deal to sponsor the Nextel Cup bars other telcos from sponsoring Nascar events or racing teams, although it did grandfather in existing sponsors Cingular and Alltel. According to a Nascar spokesman, the clause prohibits the two from rebranding or changing paint schemes on the cars. AT&T doesn't see it that way. Mark Siegel, a spokesman for the telco's wireless group, insists that the clause only bars the company from changing its brand position on the vehicle or sponsoring a different racing team. "Not being able to use our logo is ridiculous," says Siegel.

In May, a judge sided with AT&T, allowing the logo switch in a preliminary injunction. Less than a month later Nascar hit back, filing a $100 million countersuit. That suit, which derides AT&T's actions as "ambush marketing," claims the telco is interfering with Nascar's exclusive sponsorship agreement with Nextel.

Industry watchers say the countersuit may signal a change in how Nascar does business. Then again, Nascar may not have any choice. Given the merger mania currently gripping Wall Street, it's likely that a number of team sponsors will want to revisit their driver/owner contracts. Alltel, for example, was recently bought by a group of private-equity firms — and word is that the wireless provider might be a takeover target of larger telcos. (Alltel turned down an interview request from CFO.) "AT&T found a legal loophole," says DeGaris of Sponsorship Research. "Who knows if Alltel will try to jump through it as well?"

For the moment, AT&T doesn't appear to be backing down. Nascar watchers say the outcome of the case could prove vital to the long-term financial stability of the sport. Asks DeGaris: "Will the teams and the tracks be able to get together and follow a strategy that has been successful for the Olympics and for the NFL, and market as one?"

During flush times, team owners and promoters almost always let Nascar take the lead. But in leaner times, the sport's all-for-one mentality may be sorely tested. "Traditionally, this deal has worked because everybody has believed in certain things," says Hendrick CFO Lampe. "You need to protect the title sponsor, you need to protect licensing. We believe that philosophically."

Lampe pauses, then adds: "But if the growth slope flattens out, what happens? Does everybody panic? Does greed overwhelm the thing?"

John Goff is a senior editor of CFO.

The Cost of TomorrowNascar's new "Car of Tomorrow" is supposed to save racing teams money. But it could do the opposite.

To help keep racing costs in check, Nascar restricts what teams can do to their cars. "We can't fix everybody's problems," says Nascar president Mike Helton. "But with the rules-making process, we try to keep the sport to where it can be affordable."

That push can best be seen in the much-trumpeted Car of Tomorrow, essentially a set of car specifications that all teams must follow by next year. The new car design should make racing safer. In theory, the design will also make racing cheaper, since teams will no longer be allowed to build different race cars for different tracks.

Whether teams end up spending less money remains to be seen. Racing observers believe it will cost Nextel Cup teams $100 million in aggregate to make the switch. Further, several teams have already been hit with stiff penalties for violating the design specs. Before the race in June at Infineon Raceway in Sonoma, California, two Hendrick Motorsports teams (Jeff Gordon's and Jimmie Johnson's) were fined $100,000 each, and their crew chiefs suspended for six races, for violating the standard.

Moreover, Nascar's attempts to take the costs out of racing have not always been successful. "It's often the law of unintended consequences" at work, notes Stephen Pruitt, a finance professor at the University of Missouri at Kansas City. A few years back, for example, teams discovered that springs with six coils performed better than four-spring coils. They were a lot more expensive, however. So, Nascar issued a rule prohibiting six-coil springs. But deep-pocketed teams hired engineers to design a four-coil spring that performed like a six-coil spring. Says Hendrick Motorsports CFO Scott Lampe: "If Nascar wants to save us money, don't change the rules." — J.G.

So That's Why They Call Them Stock CarsWhat do Victory Lane and Wall Street have in common? You'd be surprised.

In 1992, the automotive refinish coatings business of chemical giant DuPont signed an agreement to sponsor Hendrick Motorsports's No. 24 car. At the time, the deal seemed relatively minor; Nascar was still a second-tier sport. In fact, managers at the DuPont coatings unit were just hoping the investment would lock up business with Hendrick founder Rick Hendrick, who owns a nationwide network of car dealerships, many of which have auto-body shops.

The deal has worked out much better than that. Over the past 15 years, Nascar's popularity has skyrocketed. And the driver of the No. 24 car, Jeff Gordon, has gone on to win 79 races, catapulting him to the top of the Nascar pantheon. "The sponsorship has become a prominent source of branding for many of our lines," says Ray Anderson, vice president of DuPont Refinish Americas. "It's become a corporate asset."

Indeed, a stock-car sponsorship may well be the best investment vehicle in the corporate world. Stock-car fans are wildly loyal to Nascar and, by association, Nascar sponsors. A survey conducted by Performance Research found that 71 percent of Nascar fans "almost always" or "frequently" choose a product because it is involved in the sport. By comparison, less than half of professional golf fans made the same assertion.

This devotion hasn't been lost on Wall Street. According to one study, publicly traded companies that announced Nascar sponsorships between 1995 and 2001 enjoyed mean gains in stock value of $324 million (net of market influences, market risks, and the costs of the sponsorships) within two days of the announcement. That worked out to a 1.3 percent gain in share prices. Consumer automotive businesses saw a nearly $500 million average boost in market cap. "I had expected these to be lousy investments," says Stephen Pruitt, a professor of finance at the University of Missouri at Kansas City and co-author of the study. "But Nascar produced the biggest gains by far of any sponsorship in sports."

Pruitt is currently working on another survey, examining the market-cap impact of event sponsorship — college football bowl games, golf tournaments, Nascar races, and the like. While the results have yet to be released, Pruitt does say Nascar is leading the pack. "Nascar," he says, "is the king of all events." — J.G.